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Five Below to Gain From Focus on Pre-Teen Despite Soft Margin

Zacks Equity Research

Five Below, Inc. FIVE is benefiting from merchandise assortment, focus on pre-teen customers, enhancement of digital and e-commerce channels, and pricing strategy. Moreover, healthy performance of new outlets and decent comparable sales (comps) run are aiding its performance.

Notably, shares of this Zacks Rank #3 (Hold) company have rallied 27.2% year to date against the industry’s decline of 0.2%.


A Brief Introspection

Five Below is trying to attract shoppers, especially teens and pre-teens, to expand the customer base. Further, the company remains focused on product innovations and refinement on ever-changing trends. These apart, its pricing strategy enables it to cater to demographic shoppers alongside resonating with value-seeking customers.

Moving ahead, the company is working toward enhancing customer experience, with refresh store format, remodeling programs and Ten Below test. It is also on track to improve the supply chain and deliver better WOW products. Further, the company is making efforts to achieve efficient cost structure, solid average net sales per store, supply-chain initiatives and economies of scale.

Buoyed by such well-chalked efforts, the company delivered a decent performance in the second quarter of fiscal 2019, wherein the top and bottom lines improved on a year-over-year basis. Moreover, Five Below registered the 11th successive quarter of comparable sales growth. Management now anticipates comps to grow 3% in fiscal 2019 and 2-3% in the third quarter. Net sales are projected to be $1,872-$1,892 million, whereas it reported $1,559.6 million in the last year.

However, stiff competition from brick-&-mortar stores and e-retailers, and operating margin deleverage, owing to higher SG&A expenses, cannot be ignored. After declining 160 basis points in the first quarter of fiscal 2019, operating margin contracted roughly 10 basis points to 8.6% in the second quarter. The company now envisions operating margin to decline about 175 basis points in the third quarter and deleverage slightly in fiscal 2019.

Management expects operating margin to remain under pressure in the fiscal third quarter due to SG&A expense deleverage, owing to depreciation expenses associated with the opening of new Southeast distribution center and adoption of the new lease accounting standard as well as a shift in merchandise costs from the second quarter to the third.

All said, we hope that Five Below’s endeavors will be able to address these challenges and help sustain momentum.

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